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A NEW DIRECTION IN ENVIRONMENTAL ECONOMICS

Brian Chi-ang Lin

National Chengchi University

Siqi Zheng

Massachusetts Institute of Technology and Tsinghua University

1. Introduction

The global economy has evolved into a borderless age of climate change. Numerous studies such as those of Stern (2007) and Jones et al. (2013) have pointed out that the nature of climate change is an international and intergenerational externality problem. This human-induced change in the rising global mean temperature is mainly due to the enormous emission of carbon dioxide arising from the combustion of fossil fuels. To date, more than 100 countries have adopted a global warming limit of 2 °C or below (relative to preindustrial times) as a general guideline (IPCC, 2007). That is, the concentration of carbon dioxide should be maintained at a range of 400-450 parts per million (ppm). The United States and China, the two largest national economies in the world, have recently unveiled a negotiated deal to reduce their greenhouse gas (GHG) output, with China agreeing to cap its emissions by 2030 or earlier and the United States pledging to cut its emissions to 26-28% below the 2005 levels by 2025.

The issues of climate change include not only the key investigation of global warming but also the concerns about rising sea levels, melting glaciers, changes in precipitation and storminess, and so on. Thus, climate change has become a complicated problem of uncertainty to a greater extent than any other environmental externality. Over the past two decades, academics and researchers have employed various methods to provide estimates of the economic effects of climate change. An early study conducted by Nordhaus (1994) indicates that the effect of 3 °C global warming is equivalent to a 1.3% decline in GDP. Later studies have estimated net gains and losses associated with climate change for various regions at different times (see, for example, Mendelsohn et al., 2000; Tol, 2002; and Hope, 2006). According to Dell et al. (2014), estimates across labor productivity, industrial output, and economic growth approximately converge to a 1-2% decline per 1 °C in poor countries.

Not surprisingly, sustainability has emerged as one of the most pressing issues in the 21st century since it was recognized that everyone has a stake in Our Common Future. Reacting to this phenomenon, governments all over the world have begun to implement energy preservation and carbon emission reduction policies, as well as spearheading other related initiatives. These governments have recognized that, to address such hazards, economic planning is necessary. Governments are obligated to initiate various cooperative and institutional mechanisms to internalize individual choices. They also have to coordinate various needs and interests, and to ensure an equal chance of participation for people at all levels of society.

2. Overview of Scholarly Findings

2.1 Econometric Modeling of Climate Change

This special issue seeks to offer a timely collection of papers that critically address the aforementioned challenges. Climate change, via a change in Mother Nature, may trigger unexpected consequences of economic evolution in the long run. The lead paper in this special issue by Pretis, Schneider, Smerdon, and Hendry presents an econometric methodology for detecting breaks at any point in time-series regression models, particularly applied to modeling climate change. Econometric modeling in this paper is statistically formulated without prior knowledge about stochastic breaks of climate time series and their occurrence or magnitude. The detection of structural breaks is focused on breaks in the mean through the general-to-specific approach of step-indicator saturation (SIS) and impulse-indicator saturation (IIS). The results indicate that 74% of all larger Northern Hemisphere volcanic eruptions over 20 Tg can be detected on average within an interval of ±1 year in the model temperature series spanning from years 850-2005. The break detection procedure demonstrated in this paper, according to the authors, is also instrumental for detecting previously unknown events as well as forecasting economic recessions.

2.2 Air Pollutants and CO2 emissions

The second paper by Giovanis and Ozdamar provides a new way to qualify people's marginal willingness-to-pay (MWTP) for reducing air pollutants. Air pollution generates significant negative impact on well-being, as observed in health, mood, and life satisfaction. It is crucial to have reliable estimates of the public willingness-to-pay for air pollution reduction, and they will be the key parameters in the benefit-cost analysis of public investment with the purpose of mitigating pollution. The merit of their data set is that the detailed micro-level data (from the Swiss Household Panel survey) with respondents' zip municipality codes allow the authors to map air pollution to individuals far more accurately. The authors also limit their sample to nonmovers, so as to address the possible endogeneity problem from the sorting of individuals across places with different pollution levels. A unique methodology contribution of this paper is estimating the panel structural equation model (SEM), along with a simple fixed effects regression analysis, in order to examine the causal effects of permanent income on life satisfaction, and then to calculate the MWTP values. Overall, the results show that the MWTPs are relatively low for NO2, CO, and PM10, while the highest values are observed for O3 and SO2. Additionally, it is also found that there is evidence of a substantial trade-off between income and air quality.The third paper by Auffhammer, Sun, Wu, and Zheng is a city-level analysis. They first provide the estimates of city-level industrial CO2 emissions and their growth rates for all 287 Chinese prefecture-level cities during the years of 1998-2009. Then, they decompose the CO2 emission changes into scale, composition, and technique effects. An interesting finding is that the three effects differ significantly across the three tiers of cities. The scale effect contributes to rising CO2 emissions, while the technique effect leads to declining CO2 emissions in all cities. The composition effect leads to increasing CO2 emissions in the third-tier cities, while it reduces CO2 emissions in the first- and second-tier cities, perhaps due to the relocation of energy-intensive industries from the latter to the former type of city. Based on the decomposition results, they also find that the inflow of foreign direct investment (FDI) pulls down energy intensity and thus CO2 emissions by generating a significant technique effect (with the other two effects found to be insignificant), while the environmental regulations help cities to reduce their industrial CO2 emissions through all three channels.

2.3 Environmental Sustainability, Waste Management and Recycling

To date, more and more countries in the world have taken measures to promote environmental sustainability. For instance, the Netherlands Organisation for Applied Scientific Research (TNO) published a report in 2013 (TNO, 2013) analyzing the opportunities and challenges facing the Netherlands as the country moves toward a more circular economy. It focuses on recycling in the metal and electrical sectors and the use of waste streams from biomass. The study reports that, by 2013, the Netherlands was already recycling 78% of its waste, incinerating 19% and dumping only 3%. The fourth paper by Chen, Lin, and Anderson elaborates the notion of environmental sustainability and proposes that the government can initiate a spending scheme for the green public good provision. This paper focuses on the expenditure side of the budget and argues that implementation of green spending has the potential to not only give rise to benefits of the so-called double dividend but also generate additional benefits. Specifically, the environmental sustainability condition can be met as long as the total usage of environmentally polluted resources generated by households does not exceed the equivalent absorptive capacity provided via the provision of green public goods. In other words, the provision of green public goods contributes to the attainment of the macro-environmental equilibrium. This paper also presents a greened Samuelson rule, that is, a modified Samuelson rule associated with the environmental sustainability condition.

Clearly, household waste management and recycling raise a variety of questions and also require proper cooperation among local communities. In this regard, the fifth paper by Briguglio provides a review of the relevant literature and synthesizes it around two themes: initial conditions conductive to household cooperation and intervention that may stimulate cooperation. According to the author, household cooperation in waste management is primarily stimulated by the members' desire to satisfy their moral preferences. As long as such favorable preferences exist, higher cooperation among households can be expected. However, households have limited space and time constraints for cooperation. Policy makers could further check the demographic data on poverty, dwelling size, and household size, and do their best to help communities relieve their constraints. Generally speaking, waste management intervention for...